The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on February 11, 2015 and decided to increase the refinancing rate by 50 basis points to 4.5%.
The monetary policy decision is based on the macroeconomic forecast, according to which the risks affecting the forecast inflation have risen due to external shocks. In order to neutralize the increase in inflation expectations the committee considers gradual exit out of accommodative monetary policy. However, interest rate increase, the monetary policy still accommodative as policy rate remains below the neutral value. According to the current forecasts, unless other shocks affecting the economy will occur, by the end of 2015 the monetary policy rate will be around 5%.
According to existing forecasts inflation will remain below its 5% target value in the first half of 2015 and will reach target by the end of the year. Annual inflation in January was 1.4% and this decrease mostly reflects the drop in the fuel prices. At the same time the core inflation increased to 3.2%. The inflation forecasts significantly depend on exogenous factors and contain risks of changing in both directions.The change in the exchange rate is the natural reaction of the economy to the external disbalances and as such serves as a mitigation of the negative impact. The GEL nominal effective exchange rate has not depreciated in annual terms, although GEL did depreciate vs US dollar. Given the high rate of dollarization in Georgia the depreciation vs US dollar creates additional inflation risks as a result of increased inflation expectations and increased intermediate costs related to servicing the USD-denominated loans. Taking into account the existing tendencies MPC deemed monetary policy tightening necessary to reduce the inflation risks.
The NBG will continue to monitor the developments in the economy and financial markets and will use all means and instruments at its disposal to ensure price stability. The dynamics of further changes in monetary policy will depend on the dynamics of expected inflation, tendencies in economic growth, global and regional economic environment.
The next meeting of the Monetary Policy Committee will be held on March 25, 2015.